I have worked with many people who need help managing their money who know they are in a bad financial situation but cannot clearly articulate what their issues are. Assets too low? Liabilities too high?
They know they are in debt because they cannot pay their bills on time in full, but they have no idea what that total debt number is. Or they feel like their finances are unorganized and this fact is proven when they cannot say for sure how much money they have because it is spread out over various accounts.
These folks are living in a financial bubble. Meaning, that if they do not know for sure how bad the situation is, it can’t be that bad. Right?
To break out of that financial bubble, you have to treat yourself like a business with only one employee. If you have kids or have a partner that is a stay-at-home parent, you are actually a business with multiple employees. One in which everyone will expect their pay (allowance) on time and perks… like food, clothing, and shelter. Okay, not perks, but you get my point. If your money flows in and out like a business, it is time to use the same tools businesses use to manage their money. Starting with a balance sheet.
What is a balance sheet and how can you use it to manage your NET WORTH?
A balance sheet is a statement of your cash position at a given point in time. It is comprised of assets, liabilities, and retained earnings or Net Worth. In business, companies typically review their balance sheet on a monthly basis and report it on an annual basis to shareholders or the public. To treat yourself like a business, you will need to periodically review your own balance sheet. Doing so will allow you to see your Personal Net Worth, which is the difference between your assets and liabilities. This will tell you how much money you have to reinvest into yourself, your home or whatever it is you want to do in life.
About that bubble –
You can have a six-figure salary and think life is grand. But if the difference between your assets and liabilities is only $5000, are you actually financially secure? What happens if your roof collapses or you have a large expense that insurance won’t cover? You now have to take on additional debt, increasing your liabilities, in order to pay for it. You are what my friends and I refer to as a highly paid broke person or cash poor. On the surface, you have a hefty salary, but you may be one step away from being broke.
Another risk that you face is from having an un-diversified asset pool. Let’s say you have a house that is worth $500K, but you only have $10K in savings. Maybe you have even paid off a good chunk of your mortgage. Now, what if housing values dip dramatically, all of a sudden your healthy Net Worth will also dip dramatically. If you are not paying careful attention to your balance sheet, you can see that things are not quite so balanced.
So how do you step out of this bubble?
The most important thing to do is to take stock in where you are by calculating your Net Worth and reviewing its components.
Are you comfortable with the amount? Is it too low or negative?
Next review your assets to see if it’s diversified. Is your 401K your biggest asset, but 100% of your 401k is in a single stock? It is time to start thinking of other assets to add to your portfolio to make sure you are properly protected.
I have created a simple excel Net Worth calculator. It lists items typically found in an individual’s Net Worth to take the guesswork out of deciding what needs to be included.
It is time to step OUT of the bubble.
If you want to try out my Net Worth calculator, click on this link or head directly to the shop section of my site.